What Chidambaram needs to do as the new FM

Akrita Reyar

With P Chidambaram back as the Finance Minister, there are whispers that reforms may get a fillip and policy changes may be put in place to get the Indian economy back on track.

Earlier, there were the overhyped reminders of 1991 in the press, as Prime Minister Manmohan Singh once again took over the Finance Ministry briefly. With his trusted duo Montek Ahluwalia and Rangarajan still in tow, the comparisons showed greater resemblance.

But the scenario today is radically different in more ways than one. To begin with, the world is a different place. Recession has become commonplace, and we seem to be fated to live with it in days to come.

Second, India is better respected as an economy on the global platform and, therefore, is expected to come up with a better performance, especially when neighbour China is acting as an engine of growth. On the domestic front, the era of single party dominance is over. Coalition dharma is proving to albatross around the neck of policy makers.

Amidst this mélange of circumstances, unfortunately, our government is beginning to look lost. And while the real dynamics may not actually be as foreboding as they are being made out to be, the seeming paralysis is making India lose the battle of perception.

The agenda is laid out for Chidambaram, waiting to be seized:

1. Push Reform: The Finance Minister needs to begin the badly needed fresh round of reforms. FDI in multi-brand retail should be allowed. It will send out an enormously positive message. FDI is equally and sorely needed in the aviation sector, where one company after the other is finding it difficult to sustain operations. Reforms in pension and insurance sectors have also been pending since UPA I and need to be taken up.

More than anything else, a forward movement in one area should not be matched by an equal movement backwards; because, as logic tells us, that would leave us standing exactly where we have been for a very long time now.

2. Control Inflation and Push Growth: Inflation is not just a weekly figure. The squeeze has hit the pockets of the common man with more vengeance than one had expected. With spiraling prices not looking to nose dive anytime soon, we are now living in times when vegetable prices are sometimes quoted in triple digit figures.

Global financial services firm Moody`s had said that the Indian economy is facing ‘stagflation’ – when slow growth is matched with high inflation.

"India`s economy is in stagflation, with notably weaker growth but inflation still stubbornly high," said Glenn Levine, Senior Economist, Moody`s Analytics.

The agency added, "With the inflation numbers now being driven by supply-side factors, and with the currency being pushed downwards...And India`s weaker growth prospects, we think that the RBI could cut rates without it putting too much upward pressure on inflation."

In line with inflation rates of around 7 percent and above, the agency predicted the Reserve Bank of India was likely to get a “headache” articulating rates to bring down prices.

The government obviously needs to find a way around the twin problems. While reforms can help growth, Chidambaram would need to come up with some innovative techniques to rein in inflation, especially as the latter will directly impact the way people will cast their ballot in 2014.

3. Control deficit: Pranab Mukherjee as the former Finance Minister was unable to come good on his promise of bridging the deficit.

“We believe that for an effective reduction in the cost of capital, the efficient cycle would be reduction in public expenditure (fiscal deficit) which helps to reduce consumption; increase savings and thus lowers the current account deficit and inflation pressures," Morgan Stanley said in a report on India.

This eventually would help to reduce the actual cost of borrowing in the banking system, it said.

India is also more acutely faced with the challenge of a flawed subsidy policy, which needs to reworked, even if it means taking some very unpopular measures by way of subsidy cuts, and curbing borrowings.

4. Restore Credibility: The most important task faced by P Chidambaram is to restore India’s credibility and bring back confidence of investors. A study revealed that our own businessmen are willing to move from India to greener pastures abroad due to convenience of operations elsewhere. The same sentiment is being echoed by foreigners. Just recently Apple’s CEO Tim Cook said he loved India, but found doing business in China easier. This is precisely the perception that the government needs to change.

Besides there was the 2G scam case, because of which licenses issues by Government of India had to be annulled. This damaged our country’s image as did the retrospective tax measures in the Vodafone case.

At the end of the day, entrepreneurs go where they can make profits. Unsuitable investment climate, high levels of corruption, hurdles in clearance of deals and lack of confidence in government are all hurting the prospects of India.

At the moment the negative revisions of our sovereign ratings reflect ‘mild erosions’ of confidence. But the bad news can get worse. And India could be first to fall off the coveted BRICS ellipsis.

Cues need to be taken urgently and the Indian economy needs to be put in order. So far Mukherjee’s assurances on a turnaround have not materialized.

The task is undoubtedly cut out for Chidambaram and tough decisions would need to be taken in days to come.

The question is, will he bite the bullet?